As mass production has to be accompanied by mass consumption; mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery.-- Marriner Eccles

The good thing about science is that it's true whether or not you believe in it.-- Neil deGrasse Tyson/2015 (possibly earlier)

There is still a lot of thinking on the right that if big corporations are happy, they're going to take the money they're saving and reinvest it in American workers. In fact they bought back shares, a few gave out bonuses; there's no evidence whatsoever that they[sic] money's been massively poured back into the American worker.-- Marco Rubio (darling of the Right)/2018

10 November 2015

The Poisoned Apple

Another in the line of missives centered on The Tyranny of Average Cost™ was percolating in my lower brain stem, but not yet putting fingers to keyboard, when what should I see, not tiny reindeer, but this Debbie Downer report on Apple.

Back in the beginning, even before some readers were yet born, Apple was the computer company for the rest of us. An IBM/PC cost in the neighborhood of $5,000 (that's 1981 moolah, btw), while the Apple machines were much cheaper, and less expensive. Then came the Age of the Clone, and the race to the bottom, and so on. With the Mac, Apple became the computer for the upper X%. X being somewhere in the range of 10 to 20. The die, to quote Caesar, was cast.

These days, Apple is largely The High End Smartphone Company. But no one, that I've seen in the popular press, has asked the simple question: can Apple survive without all those low end (and, allegedly, unprofitable) phones flooding the world? And, of course for those following the bouncing ball, not even close. Let's consider a small thought experiment, since dragging out specific data will be arduous if not impossible.

There are a few major fabs: Intel, Taiwan Semiconductor, Samsung, GlobalFoundries.

But $500/wafer is a far cry from the $1,600 or so that a finished memory chip wafer costs, or the $5,000-odd cost of a finished high-end processor wafer. Of that cost half or more is capital depreciation on the equipment that converts the raw wafer to finished chips.

The lion's share of the capital depreciation is lithography equipment, basically cameras on steroids.

Trying to figure out the total shipments of all cpu is beyond my patience. But, if we take the 10 billion/annum shipments of ARM designs as a base, then ask how many of those went into Apple phones, we get some idea of Apple's dependence on foundries' capacity. In 2013, around 150 million were shifted.

So, 150 million out of 10 billion cpu. Apple, as is so often the case with the right wing, is parasitic off the low end. IOW, without all those 9.8 billion other cpu sales, Apple would have to absorb the amortized capex of the foundries all by itself. And this, of course, is the rationale of all those fabless chip companies; get rid of real capital in order to drive up RONA. By the simple expedient of having no assets and charging everything to direct cost. Of course, the assets do have to exist someplace, so from a macro view it's all a shell game. And a zero-sum one, at that.

Ironically, Apple's Watch has been held up as the great disrupter of the Swiss (aka, really really expensive) watch industry; and may not be selling all that well. In fact, it has been the actions of Swatch to stop supplying base movements to the rest of Swiss watch makers. The conflict has been going on for years, but boils down to The Tyranny of Average Cost™: Swatch has the existing capacity to supply all of the boutique watch makers, who themselves individually can't find the capital to create production capacity (which is redundant at the outset). Some of the larger small makers have gone into production of base mechanisms in the last few years, but it is wasted capital, in the macro sense. Swatch's high-end brands now have a cost advantage, in that the capex has been paid for by the boutique makers over the years, while they have had to invest in redundant capacity. The customer and the boutique makers lose, while Swatch wins. Ah, tyranny they name is Rand.

Yeah, I know, this is back of the envelope figuring, but the The Tyranny of Average Cost™ can't be denied. Apple is, through its foundry suppliers, able to cater to the 20% by virtue of the existence of the 80%. Or, as discussed some time ago, if only the 1% get healthcare, they'll demand Obamacare for themselves, since they surely don't want to carry the capex of the healthcare system all by their lonesomes. They may hate, and condemn their oppression by, the 47% but they need the 47% to participate in order to staunch The Tyranny of Average Cost™. If only the 1% get MRIs, how much will an MRI cost? A lot.